x Abu Dhabi, UAEMonday 24 July 2017

China's thirst for oil has multiple agendas

Output has peaked but with industrialisation and a growing population that can afford cars, the country's thirst for oil will not be slaked.

China is hunting far and wide for new sources of energy.
China is hunting far and wide for new sources of energy.

BEIJING // China's rapid industrialisation and hunger for more cars is leading to a serious thirst for oil, one that should keep growing for the next decade and that has seen the nation sign deals all over the world.

Late last month, the China National Offshore Oil Corporation (CNOOC) announced it was drilling the deepest ever exploration well that Kenya has ever seen: the US$26 million (Dh95.4m) Boghal-1 well in Block 9 of the country's northern Anza Basin. "We will work closely with our colleagues to realise a win-win co-operation - functioning as a bridge between these two great countries," Wu Guangqi, the executive director of CNOOC, said as the deal was signed.

The language of Mr Wu's comment illustrates how China sees co-operation in the oil market as a way of helping it to secure supply, but also of widening its political and economic influence in the world. China thinks very carefully about exactly how to diversify its oil supplies, and it needs to. The second-largest oil importer in the world after the US, China buys 4.1 million barrels of oil every day. Last year, it imported 200.67 million tonnes of oil, accounting for 52 per cent of its total domestic consumption.

The big year for demand in China was 2004, when industrial expansion was at its peak. But despite an easing since then, China's role in the global oil market is pivotal and continues to expand at a furious rate, due to industrialisation and more families buying cars. China's apparent oil demand rose 12.5 per cent in September from a year earlier, the sixth rise in a row and the fastest rate since June 2006. Refiners were working at record rates amid a sustained recovery in economic activity.

China's main transport fuel is diesel and demand for this grew 7.7 per cent from a year earlier, a sign of more robust industrial activity. Goldman Sachs stuck to its forecast late last month that crude oil will reach $85 a barrel by the end of this year on the back of "robust" demand for diesel in China. China's own domestic oil output has probably peaked for now at about 200 million tonnes a year, so the country relies on importing oil.

Its thirst for oil is good news for countries such as the UAE. "On one hand, for oil-exporting countries like the UAE, China provides a large market," said Qiu Xiaofeng, an oil analyst with China Merchant's Securities. "And on the other hand, China's economic development needs energy, of course. And the relationship with other countries could provide an energy security for economic growth." China has been chasing oil reserves in Africa. It has made inroads into countries with relatively small output, such as Mali and Niger, but has struggled in the bigger producers such as Nigeria.

But these struggles may be paying off. Last month, the Nigerian government announced China would double its direct investment to $6bn, most of that into the oil sector. And last month, China struck a mining and infrastructure deal with Guinea worth $7bn - higher than Guinea's annual output. Yang Jiechi, the Chinese foreign minister, has said China would further its ties with Africa at the two-day Forum on China-Africa Co-operation in Egypt, starting on Sunday.

In February, China signed loan-for-oil deals with Venezuela and Brazil. During a visit by Vladimir Putin, the Russian prime minister, to Beijing last month, a $100bn oil export contract was signed that will guarantee stable oil supplies for 20 years, starting next year with 300,000 barrels per day. "China's demand for oil will continue to increase for the next 10 years," said Mr Qiu. "China's steel output has already reached a peak but, compared with other developed countries, China's rate of automobile ownership is still very low. With China's GDP growth and the development of per capita GDP, more and more families will buy cars. Add to this China's large population and you can see how - oil demand will continue to grow."

China has widened its lead over the US as the world's top car market, with September sales jumping 78 per cent on September last year, spurred by tax cuts and government stimulus spending. China is keen to keep its import sources as diverse as possible to minimise risk. This means it imports oil from countries, including those in the Middle East, Africa and South America, as well as Russia. Another factor behind China's growing oil consumption is that it remains reliant on coal, which accounts for 70 per cent of its power needs, but is keen to reduce that.

China's oil and natural gas consumption is low when compared with other developed countries. But it has been aggressive in backing renewable energies because the price of oil and coal is prone to spiking. There is also the environmental protection factor, and China is eager to be seen to be boosting solar power, as well as hydro, wind, nuclear and biomass options, particularly in the lead-up to the Copenhagen summit.

China is working on the development of other forms of energy, such as nuclear power and natural gas. "But developing these energies on a large scale asks for time and technology. So I think the oil consumption will continue growing gradually in the near future," said Mr Qiu. @Email:business@thenational.ae